Improvements on blockchain
The year 2021 was a watershed moment for blockchain. The value of the cryptocurrency market has crossed $3 trillion. With over $23 billion in trade volume, NFTs have grown in popularity. The first bitcoin ETF based on futures was created in the United States. The Central American country El Salvador has made bitcoin legal tender. The way Ethereum receives gas fees has changed. As a result of the several new chains created, the total value locked (TVL) on DeFi surged sevenfold year over year, topping $200 billion. The number of people using blockchain wallets has risen to 70 million.
More lately, cryptocurrencies have been utilized as a non-regulatory means of transmitting money across borders to support causes that people care about. Though the crypto market originally plunged sharply following the commencement of the war in Ukraine, it has subsequently recovered to pre-war levels, with about $30 million in crypto donations generated for the Ukrainian military since the conflict began. After being turned down by standard financing platforms such as GoFundMe, the trucker protesters in Canada got over $900,000 in cryptocurrency donations. People will continue to be able to donate money to charities utilizing cryptocurrency in ways that would not have been conceivable with traditional banking infrastructure.
The massive increase in adoption has paved the way for advancements in all aspects of the blockchain ecosystem, including blockchain infrastructure improvements, blockchain-based applications, the adoption of more mainstream and developer-friendly programming languages, and a greater focus on regulation and institutional adoption. The biggest blockchain trends to watch in 2022 are presented below.
In the blockchain space, there have been advancements. With the launch of new Layer 1 (L1) blockchains, as well as advances in consensus protocols, transaction costs, transaction times, and tokenomics, we anticipate seeing more advancements in the blockchain industry in 2022. We also anticipate advancements in Layer 2 (L2) solutions that can improve the scalability of existing L1 solutions, as well as a greater focus on the development of bridging solutions that will make it easier for users to transfer funds from one chain to another, paving the way for a multichain future. We believe that in the battle between numerous L1 and L2 solutions, an emphasis on scalability, i.e. more transactions at quicker rates, will select the winners.
Multichain Interoperability Solutions are on the Rise
In 2021, we witnessed the rise of various L1 chains and L2 solutions, and the requirement for interchain liquidity became a clear impediment to wider adoption, but it also provided a key development opportunity.
Several L1 and L2 solutions were introduced between 2017 and 2021 to improve transaction speeds and lower prices, with Polygon, Avalanche, Optimism, Terra, and Solana being some of the more popular newer chains. These chains have drawn developers to build a variety of open-source financial applications, games, and more using smart contract features.
The ability to transfer funds from one chain to another is critical to take advantage of the specific properties of different chains, such as transaction costs and wait times, and to maximize one’s return on investment.
We’re seeing a trend where decentralized exchange (DEX) aggregators, like Paraswap, which allows users to find better token swap rates across different DEXs, are integrating with bridges to allow users to swap tokens not only on the same chain but also across chains. Cross-chain solutions such as Symbiosis Finance, Multichain, or Atlasdex can help with applications that haven’t been deployed on multiple chains. Multichain, one such cross-chain token transference mechanism, has gathered approximately $7.7 billion in TVL from many chains to enable cross-chain transfers and native swaps.
Popular DeFi apps like Aave, Curve, and Uniswap, which were previously only available on the Ethereum blockchain, have already gone multichain. Users will no longer need to shift liquidity across other blockchains to interact with a certain application as a result of this.
Enhancements to the DEX user experience and the effectiveness of capital allocation
The user experience of Decentralized Exchanges (DEXs) is projected to improve this year, both in terms of simplicity of use and capital efficiency.
DEXs (exchanges where you can trade one token for another) will grow significantly more complicated under the hood. Uniswap used a straightforward price model of x * y = k. (constant product formula). Where x and y are the amounts of the two tokens that make up the liquidity pool, respectively. While this is simple to comprehend, it has a significant financial impact.
These algorithms aim to lessen the price impact on transactions, i.e. the fluctuation in the relative value of token x concerning token y as users swap tokens. These new conversion algorithms ensure that the price remains steady (around 1) for relatively minor trades, resulting in minimal price impact and the establishment of smaller liquidity pools.
Many DEXs are incorporating order-book functionality. Uniswap v3 has already shifted the traditional Automated Market Maker (AMM) architecture to one that resembles an order book (with liquidity providers able to limit their liquidity to specific price ranges). This is referred to as concentrated liquidity.
dYdX is a modern DEX that operates based on an order book. dYdX’s TVL is rapidly rising ($1.1 billion in November 2021), and it’s already approaching Uniswap’s trading volume (Uniswap’s daily volumes are over $1.3 billion, while dYdX’s are around $950 million). Uniswap, on the other hand, continues to have much larger sales, with daily all-time high (ATH) revenues of $17.7 million, compared to $6.8 million for dYdX. Sushiswap intends to develop a comparable product shortly, and additional players are expected to follow suit.
Other enhancements in the DEX space include single-sided liquidity deployment, temporary loss insurance, batching and netting of transactions, limit orders, leverage trading, and the use of Layer 2 solutions, all of which attempt to improve the user experience.